Bank of France

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The Bank of France is the central bank in France. It compares to the Bank of England or the Federal Reserve System in the United States, and is responsible for regulating the money stock, interest rates, and credit conditions in France.

When Napoleon assumed the reins of power in 1799 he knew the French government had lost all credibility as a borrower, a factor that had helped spark the French Revolution. His government needed to raise money, but selling government bonds was not a practicable means to do so as there was no market for discredited government debt at the time. In 1800 Napoleon created the Bank of France to help with this problem. It was initially capitalized at 30 million livres. Three years later livres were replaced by the new currency, francs, making the capitalization 30 million francs. Openly calling the new institution a bank was itself a bold move. After the disaster of John Law’s bank in 1720 the very term bank had fallen into disrepute in France and disappeared from the names of French financial institutions.

The financial capital for the Bank of France came partly from the capital of the Caisse des Comptes Courants, a Paris discount bank issuing bank notes (paper money) that dissolved and merged into the new institution. Other capital for the bank was raised from public subscriptions, and an additional sum came from the government. The Bank of France was organized as a corporation, the stockholders of which elected a governing committee.

In 1803 the government granted the Bank of France the exclusive privilege to issue bank notes in Paris. The other main note-issuing bank in Paris, the Caisse d’Escompte du Commerce, had been merged unwillingly with the Bank of France in 1802. Other note-issuing banks in Paris were required to withdraw their bank notes before a certain date. Any new note-issuing banks in the provinces had to have the approval of the government.

From the beginning Napoleon wanted the Bank of France to purchase government bonds at the lowest possible interest rates and pay for the bonds with bank notes. In 1804 the bank caved in to government pressure and issued too many bank notes amid rumors that Napoleon had shipped the metallic reserves to Germany for military purposes. A crisis forced the bank to partially suspend convertibility of its bank notes into specie, and the notes depreciated 10 to 15 percent, while the bank—rather than the government—took the blame for the crisis.

In 1806 the governance of the bank underwent a major overhaul. A government-appointed governor and two deputy governors replaced the committee elected by the stockholders. Another partial suspension of convertibility came in 1814.

Napoleon emphasized low interest rates as a means of softening the blow of his continental blockade. He pressured the bank to keep its discount rate (central bank interest rate to borrowers) in the 4 to 5 percent range, a practice the bank continued until the mid-nineteenth century. He also encouraged the bank to act as a lender of last resort.

The Bank of France took advantage of its authorization to set up branch banks in the provinces. However, these branch banks were unsuccessful at first, even in places where they had regional monopolies on the issuance of bank notes. A few private banks opening in the provinces were also unprofitable at first, mainly because of strict government regulation. However, by 1840 private banks began to be a threat in the provinces. After 1840 the government refused to grant charters for new private banks with authority to issue bank notes. Between 1841 and 1848 the Bank of France opened 15 branch banks in the provinces.

In the political crises of 1848 the French government counted on the Bank of France for financial support. The public, remembering the worthless assignats of the Revolution, began to convert bank notes into specie and hoard it. The government responding by declaring Bank of France bank notes legal tender throughout the nation, and putting a limit on the number of bank notes the Bank of France could issue. The Bank of France now achieved a clear advantage over the private provincial banks, whose bank notes were only legal tender in their respective regions. The private provincial banks then merged with the Bank of France, and the Bank of France acquired a nationwide monopoly on the issuance of bank notes.

The Bank of France kept its discount rate fairly constant until the 1850s, when it began the practice of adjusting its discount rate to regulate the flow of specie. An increase in the discount rate could halt a specie outflow. In 1857 the bank became exempt from the usury law setting a 6 percent ceiling on interest rates.

By 1900 the Bank of France had some kind of office in 411 French towns, and had as many as 120 full branches, substantially more than the eight branches that the Bank of England had in Britain. The Bank of France played a much greater role in the French money and banking system than the comparable Bank of England played in the British system. The tight control that the Bank of France held over the development of banking in France may have inhibited French economic growth in the nineteenth century. During World War I and World War II the French government relied heavily on the Bank of France to buy government bonds with the issuance of bank notes as a measure of war finance. Bank notes increased 400 percent between 1940 and 1945, but controls suppressed inflation until 1944. The government nationalized the Bank of France in 1945. Inflation grew to acute levels in the 1950s.

On 4 August 1993 the Bank of France won its independence from political authorities in a piece of landmark legislation. With its newly won independence came a renewed commitment to price stability as its top priority regardless of domestic political pressures.

In 1998 the Bank of France joined the European System of Central Banks, which on 1 January 1999 assumed responsibility for implementing a single monetary policy for all member states of the European Monetary Union.